RBI likely to continue using forex reserve to reduce volatility: Report

The Indian rupee will hold steady against the U.S. dollar over the coming year as the Reserve Bank of India will use its considerable FX reserves to reduce volatility and keep the currency on a tight leash, a Reuters poll found.

While most Asian currencies posted gains against the greenback following the Federal Reserve's larger-than-expected 50 basis point rate cut last month, the rupee has traded largely flat with the currency, losing just around 0.8 per cent for the year.

That remarkable stability - which is not commonplace among emerging market currencies - was mostly because of the RBI's regular interventions in the foreign exchange market using its $692 billion in forex reserves.

 

The value of the partially convertible rupee is unlikely to change going forward, according to a Reuters poll of 40 FX strategists taken Sept. 30-Oct. 3.

It was expected to trade between 83.73 and 83.50 per dollar in the next six months, a 0.2 per cent-0.5 per cent drop from around 83.96/$ on Thursday.

The rupee was then forecast to gain about 1 per cent to 83.30/$ in a year.

"We see no sign of change in RBI's pursuit of a higher reserves buffer, which would limit the appreciation potential for the rupee," noted Claudio Piron, emerging Asia FI/FX strategist at Bank of America.

"However, persistent dollar depreciation may result in a catch-up move in the rupee in the near term, with the potential for the rupee to go toward the recent range's bottom."

The rupee's trade-weighted real effective exchange rate stood at 105.45 in August, down from 107.45 in July, according to the RBI's monthly bulletin, suggesting the currency is overvalued by about 5 per cent.